Not “just a standard form document to sign”

In the construction world, it’s common for clients, funders, and end-users to want direct legal recourse against those delivering the project—especially if things go wrong. That’s where collateral warranties come in.

These agreements are often seen as standard paperwork, but for contractors, they carry real legal and financial consequences. Whether you’re delivering a major commercial development or a smaller design-and-build package, it’s important to understand the role of collateral warranties—and why taking legal advice before signing is more than just a box-ticking exercise.

What is a Collateral Warranty?

A collateral warranty is a legal agreement that creates a direct contractual link between a contractor (or other project party) and a third party, such as a funder, purchaser, tenant, or landlord. These third parties usually don’t have rights under the main building contract but want assurances that the work will be done properly—and that they can claim if it isn’t.

From a legal perspective, the warranty “collateralises” the duty of care owed under the main contract, effectively giving the third party similar rights to those of the client. For contractors, this means you’re now directly liable to someone you haven’t contracted with—and that liability can last for years.

Why Legal Advice Matters

Collateral warranties may appear straightforward, but the devil is in the detail. Here’s why legal advice is crucial:

1. Understanding the Scope of Your Liability

The warranty should reflect your obligations under the main contract—but sometimes, additional or stricter terms are introduced. You may be agreeing to a higher standard of care, an extended liability period, or extra duties. A legal review ensures the scope is fair and consistent with your role.

2. Managing Long-Term Risk

Warranties typically last 6 to 12 years after completion. This means a claim could arise long after you’ve left site and been paid. Legal advice can help negotiate limitation periods, liability caps, and exclusions to protect you from open-ended exposure.

3. Controlling Assignability

Many warranties allow the beneficiary to assign their rights to others—sometimes multiple times. This can result in claims from parties you’ve never dealt with. We can help you limit the number of permitted assignments and require notice of any transfer.

4. Insurance Compatibility

If you’re giving warranties that include design responsibility or fitness for purpose obligations, your insurance must cover them. It is important to ensure that the terms align with your professional indemnity or contractors’ all-risk insurance policies.

5. Consistency Down the Chain

If you’re using subcontractors, you may need them to give collateral warranties too and ensure your subcontract terms match your obligations, so you’re not left exposed by a mismatch in liability.

Common Traps for Contractors

Here are a few common risks we regularly spot when reviewing warranties for contractor clients:

• Uncapped liability or liability that exceeds what is covered by insurance
• Extended limitation periods (e.g., more than 12 years)
• Fitness for purpose obligations that go beyond the usual duty to exercise reasonable skill and care
• Onerous step-in rights allowing funders or purchasers to take over your contract without notice
• Indemnities in favour of the beneficiary—often more dangerous than standard damages liability

All of these can be managed or removed with careful legal drafting and negotiation.

Final Thoughts

While collateral warranties are often treated as a routine part of a construction project, they can have lasting implications for contractors—especially when it comes to liability, insurance, and risk exposure.

Early legal input can help identify unreasonable terms, negotiate fairer ones, and ensure your business is properly protected. It also helps you align obligations across your subcontractor chain and insurance coverage—saving you significant headaches later on.

Need Legal Support?

Our team regularly advises contractors on collateral warranties and related contract matters. Whether you’re reviewing terms for a current project or putting together a suite of warranties for funders or tenants, we can help make sure your legal position is protected.

You can also complete an online enquiry form. One of the Wollens team will contact you as soon as they are available.